We visited Jindal Steel and Power’s (JSP) Angul steel plant. The company appears to be on track to more than double its steel capacity at Angul to ~5mt (from current ~2mt) in two years by adding capacity through a more efficient hot metal production route (currently DRI). There are four main processes in this capacity addition: coke oven, sinter plant, blast furnace and blast oxygen furnace. Key highlights from the visit:

* Coke oven:

Of the four batteries totaling ~2mt, one is already in operation. Coke from the plant is being sent to Raigarh. The second battery has been heated, and preparation is underway for lighting. Construction of the third and fourth batteries is yet to commence. It will take 14 months to commission all the batteries. In the interim, this would lead to some shortage if the blast furnace (BF) were to run at full capacity.

* Sinter plant:

The construction is largely complete. Cold trial is underway. However, some electric panels are yet to arrive before the plant can be commissioned.

* Blast furnace:

The BF of 3.2mt is targeted to commission by 30 March 2017. The stoves are already heated, and cold trials are underway.

* Blast oxygen furnace:

A lot of work is pending. Management expects to commission the unit by August 2017. In the interim (BF commissioning by March), it plans to sell pig iron.

While there are some gaps, the activities are progressing at a healthy pace. We believe the company can achieve ~3mt production from Angul by FY19E, provided it does not run into fund crunch again. JSP managed FY17 by squeezing cash from working capital and also helped by an improvement in the steel market. Cash flows in FY18 are likely to improve. Hence, we believe capacity addition should be manageable.

New furnace to drive sharp turnaround; Maintain Buy

The pace of development at Angul reinforces our view that steel sales volumes will increase from ~3.3mt in FY17E to 5.8mt by FY19E, implying a CAGR of 31%. We expect consolidated EBITDA CAGR FY17-19E of 32% to INR78b. Although adjusted PAT would remain negative due to bloated depreciation on massive asset revaluation, there will be a sharp turnaround in cash profits. The SOTP-based TP is INR180/share. Maintain Buy.

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